The Nikkei-Dow index fell 5.6 per cent, prompting nervous selling in most world financial centres as Japan vied with Mexico for the attention of anxious investors.
Martin Jones, technical analyst at BNP Capital Markets, said: "It has been blown out of the water and will trend lower."
In already tense international markets, the almost daily increases in estimates of the costs of making good the earthquake damage in the Kobe area appear suddenly to have broken investor nerves.
Frazer Chalmers, international fund manager at BZW said: "There seems to have been a complete loss of confidence by the local Japanese. There are some hysterical numbers going around, and this is amplifying the sense of disruption."
Kosaku Inaba, president of the Japan Chamber of Commerce and Industry, said the damage from the earthquake could cost more than Y40,000bn (£253,000m) to repair, equivalent to about 10 per cent of Japan's gross national product.
While most estimates have been below this figure, fears have nonetheless returned to the markets that the disruption of the Japanese economy is going to be considerable, at least in the short term .
Alison Southey of Nomura said that US mutual funds, burned by recent forays abroad, were taking refuge in their "parochial" profile of some years ago.
"The whole international community is feeling pretty battered so they are retreating significantly, but particularly American investors, who have had Mexico as well."
Nick Knight, of Nomura, said the uncertainty was likely to lead to a general exodus from equities. "Given the amount of money that the foreigners pumped into the Japanese market last year, the actual and psychological impact of this should probably not be under-estimated. This is most unlikely to result in a flight to quality within the equity arena but a flight into safety, that is, cash," he said.
At the end of last year, many international fund managers increased their exposure to Japan in the expectation of rapidly rising corporate earnings as the economy recovered.
This calculation now appears to have been upset by growing worries that the long-term benefits of reconstruction will be preceded by considerable pain in the shape of economic disruption, and that consumers may choose to save more as a reaction to the uncertainty.